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Supply Chain Mover Vice Adm. Mark D. Harnitchek Director Defense Logistics Agency

2014

Defense Logistics Agency

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Managing Inventory and Costs for a Global Supply Network

Vice Admiral Mark D. Harnitchek Director Defense Logistics Agency Vice Admiral Mark Harnitchek became director of the Defense Logistics Agency in November 2011. As such, he is responsible for providing the Army, Navy, Air Force, Marine Corps and other federal agencies with a variety of logistics, acquisition and technical services in peace and war. These services include logistics information, materiel management, procurement, warehousing and distribution of spare parts, food, clothing, medical supplies and fuel, as well as reutilization of surplus military materiel and document automation and production. This worldwide mission is performed by nearly 27,000 civilian and military personnel.

He previously served as deputy commander, U.S. Transportation Command, Scott Air Force Base, Ill. Harnitchek, a native of Philadelphia, received a Bachelor of Arts degree from Penn State University in 1977 and was commissioned through the Navy ROTC program. In 1987, he received a master’s degree in management from the Naval Postgraduate School, Monterey, Calif.

Harnitchek has served in a variety of sea tours including two submarines, USS Will Rogers (SSBN 659) and USS Buffalo (SSN715); two ships, USS Holland (AS-32) and USS Proteus (AS-19); and the aircraft carrier, USS Theodore Roosevelt (CVN-71). His shore tours include commander, Submarine Group 7, Yokosuka, Japan; the Navy Ships Parts Control Center, Naval Air Station Oceana, Va.; and the Chief of Naval Operations Staff.

Flag assignments include commanding officer, Naval Inventory Control Point; vice director for logistics, the Joint Staff; Director, Strategy, Policy, Programs and Logistics, USTRANSCOM; and director, U.S. Central Command Deployment and Distribution Operations Center in operations Iraqi and Enduring Freedom.

Q: Last fall, you announced that you updated your “10 in five” strategy to reduce cost while improving support to the warfighter.

The new goal is $13 billion savings in six years. What are the major aspects of this strategy, and how does it build on the original “10 in five” approach?

A: It’s actually exactly the same as the original approach—the savings number has just gotten bigger by $3 billion. We were very mindful that the message, and our approach, remain consistent year over year. So, other than increasing our goal to save the department $13 billion over the next six years, the strategy to www.MLF-kmi.com

significantly improve our performance to the warfighter while dramatically reducing costs has not changed. We are doing this by focusing on five core priorities: improve customer service; decrease material costs; right-size our inventory and infrastructure; decrease operating costs; and achieve audit readiness.

Q: Much of your budget is dependent on spending by the services—your customers. How would you characterize your budget and how do you expect spending to affect operations, upgrades, staffing and your day-to-day operations?

A: We have two big costs here. First is the cost of material, that’s the stuff we buy. The other is our cost of operations. About a year ago we were around $40 billion in sales, and that includes our cost of operations and our cost of materials, so it’s about $35 billion in material and $5 billion for operations. A real direct effort here is to reduce both, and we’re projecting $35 billion for FY14. As our projected sales come down from the highs we saw in FY11 and 2012, one of our challenges is to drive out costs so we can keep our surcharge rate constant. I’ve committed to our customers that we’ll make this happen.

Defense Logistics Agency | MLF 8.5 | 1

Defense Logistics Agency Headquarters

Vice Adm. Mark D. Harnitchek SC, USN, Director

2014

Brig. Gen. Steven A. Shapiro USA, Commander DLA Troop Support

Brig. Gen. Mark K. Johnson USAF, Commander DLA Aviation

Corporate Staff

David Rodriguez Director DLA Installation Support

Col. Allen W. Kiefer USA, Director DLA Office of Inspector General

Fred T. Pribble DLA General Counsel (DG)

Brad B. Bunn Director DLA Human Resources (J1)

Rear Adm. Vincent Griffith SC, USN, Director DLA Logistics Operations (J3)

Bobbi L. Collins Acting Commander DLA Pacific

Col. Joseph E. Ladner IV USA, Commander DLA Europe and Africa

Col. Mark A. McCormick USA, Commander DLA Central

Rear Adm. Ron J. MacLaren USN, Director Joint Contingency Acquisition Support Office

Command Sgt. Maj. Sultan A. Muhammad, USA Senior Enlisted Leader

Renee L. Roman Chief of Staff

Edward J. Case Vice Director

Rear Adm. David R. Pimpo SC, USN, Commander DLA Land and Maritime

Brig. Gen. Richard B. Dix USA, Commander DLA Distribution

Brig. Gen. Giovanni K. Tuck USAF, Commander DLA Energy

Col. Michael O. Cannon USAF, Director DLA Disposition Services

Phyllisa Goldenberg Director, DLA Strategic Plans and Policy (J5)

Kathy Cutler Director, DLA Information Operations (J6)

Matthew R. Beebe Director DLA Acquisition (J7)

J. Anthony Poleo Director DLA Finance (J8)

Raymond Zingaretti Director DLA Logistics Information Services

Stephen T. Sherman Director DLA Document Services

Ronnie Favors Administrator DLA Strategic Materials

Rear Adm. Ron J. MacLaren USN, Director Joint Reserve Force (J9)

Amy Sajda Director DLA Small Business (DB)

defense logistics agency We feel a lot of pressure to reduce the cost of material and we work closely with our customers and industry to make informed projections about the future demand for DLA goods and services.

Q: Driving cost comes partly from being efficient and maximizing what you do. Part of it comes from negotiating with industry to make sure you can get the best product at the lowest price.

Is there a concern within DLA and DoD in general that industry could be pushed to a point where it’s not reasonable to do business with the government because they’ve driven the cost down so low?

A: When we talk to industry, one of the things we discuss is that none of what we do is an attack on their profit or the industrial base—it’s a joint government/industry attack on cost. You’ve heard of our Captains of Industry meetings. We lay out the strategy, chapter and verse with them in terms of what our goals are, and make them our strategic partners in achieving those savings. The lion’s share of the costs of materials that we’ve taken out have come from suggestions by industry—in fact, I would say that this figure is probably 50 percent and we expect to save about $1.4 billion through FY18. When you make your partners part of the strategy and the execution, you can achieve really miraculous things.

Some of our methods are acquisition-centric; for example, we make heavy use of reverse auctions. If we have an acquisition that is $150,000 or more, we go through the normal acquisition strategy, whether that is a best-value or a low-price/technically acceptable [acquisition], and instead of using final negotiations and a best and final offer sealed in an envelope, if you will, we use the reverse auction process.

It does put a little more pressure on the industry, but if you’re an industry leader, would you want to lose a $10 billion contract over a 2 percent difference in price? If a company is able to see what the competition is bidding, and they know what their margins are, their costs, and they know exactly how high or low they can go, it allows them to intelligently price their offer.

We use reverse auctions across all of our supply chains. However, we found that for our Clothing and Textile Supply Chain, reverse auctions were not an appropriate pricing tool. In this particular supply chain, we realized that its industrial base is very fragile since most of it has moved offshore. So we met with our partners, our Captains of Industry for the clothing and textile sector, and we had a disinterested third party look at reverse auctions. They came back to us and said, ‘You may be getting a great deal on a $70 service dress coat, but you’re putting a tremendous amount of cost pressure on an industry that’s already right at the margins here.’

In the interest of getting great products at a great price but maintaining a robust industrial base, they recommended that reverse auctions probably are not the best pricing strategy for that sector.

As a result, we’ve gone back to all best value and we price it using final negotiations and a best and final offer. This is an example of working with industry—listening to our industry partners, valuing their feedback, and when we don’t get it exactly right we do something different.

We’ve probably saved about $2.2 billion in reverse auctions alone—that’s about 18 months of reverse auctions, between 5,0006,000 reverse auctions. They’ve been great. But most of the other savings, frankly, have come from industry.

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For example, we have an OCONUS food service Captains of Industry with our subsistence prime vendors. When we had all of our prime vendors in here a few years ago, one of the things they told us was, ‘You have way too many products in your catalog.’

Here’s a great example: We had 154 different kinds of chicken.

So, looking at chicken, are there really 154 ways to describe the parts of a chicken? You might think the answer to that question was no, but we were doing exactly that. We had “wings-spicy,” “wings-peppery,” “wings-Buffalo,” and so on. And while it sounds sort of silly, buying and stocking 154 different kinds of chicken from 26 vendors makes for some expensive chicken!

So, with industries’ suggestion and working with the services, we went from 154 different descriptions of chicken parts to 30, and we went from 26 suppliers to two suppliers. That has saved us, and the services, 20 percent. And each year we spend $121 million on chicken, so 20 percent is significant. If we do this across all our food items—beef, pork, seafood, canned fruits and vegetables—you name it, soup to nuts, we can save a lot of money and get great food to the crew.

Q: That was a Captains of Industry suggestion?

A: That’s right, it came directly from industry and it was free advice. Another suggestion as a result of the Captains of Industry was that we were spending way too much money on military packaging. They used the example of a Fram oil filter—it’s the typical orange filter that comes in an orange box—you can go to almost any auto parts supplier and grab one off the shelf—just like the ones we use. However, we were requiring Fram to take their oil filter out of their box, put it in bubble wrap and pack it in a larger cardboard box. That cost the government about 80 cents more per filter. We use a lot of oil filters and 80 cents per filter over a year is real money. Extrapolate that across all of our products that are re-packaged, you’re talking about cost saving of up to $120-150 million a year.

What we’ve done—not for all of our products, but most of them—is go with good old commercial packaging. What industry tells us is that any time you ask them to do something that isn’t done for their commercial customers, it costs more money. Sometimes that’s okay, but many times, it’s not. Using commercial packaging also helps us become more green. By not introducing a lot more cardboard and bubble wrap into the waste stream we become more environmentally friendly. We have really hit a lot of homers with regard to cost of material—just with ideas from industry.

Q: Let’s talk about acquisition reform. Much of that seems to come from the length of time it takes to award a contract, from whenever that starts to whenever it’s awarded. You talk about a goal of 270 days or less for the process. What are the challenges to that? Can those challenges realistically be overcome in the environment that DLA has to work within?

A: I will tell you, across the board, and not just at DLA but everywhere within DoD, it takes us too long to award a contract. This has also been a continuing theme with all of our Captains of Industry, in all of our nine supply chains.

So in response, we’re reducing our acquisition timelines by about 66 percent. To accomplish this our goal for automated www.MLF-kmi.com

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Defense Logistics Agency | MLF 8.5 | 5

defense logistics agency small purchases is 10 days, manual small purchases is in 35 days, large contracts in less than 110 days, long-term contracts for less than $10 million in 140 days or less, and long-term contracts for more than $10 million in less than 190 days.

We looked at the contracting process and split the activities of that process between non-value-added and value-added. Our goal is to pull as much of the white space out of the process—the time waiting for something else to happen. If you take a hard look at the process in terms of real value-added activity, meaning something which results in a contract, it’s a fraction of the total time. Almost all of the time is wait time.

We’ve set very aggressive goals, we’re taking a little risk—not a lot—and we’re going to hold ourselves accountable to reduce our acquisition timeline. There’s really no cosmic solution here; it all boils down to basic busiAdm. Mark Harnitchek and his son Army 1st Lieutenant Kyle Harnitchek greet one another at Bagram Air Base, Afghanistan in April ness and leadership. And it’s necessarily all Vice 2013. [Photo courtesy of DoD] about speed for the sake of speed, but a faster needs of your customers, what they’re going to want at whatever process is more responsive to customer needs and it requires us to time. Are the services and DLA on the same page about how to carry far less inventory. Like Ben Franklin said, “Time is money.” forecast? Do you speak the same language about forecasting, and how do you communicate with everyone about inventory control?

Q: Are the contract administrators being given any more authority to push this along? Is there more of an individual mandate that each A: We are masters of forecasting. The problem is in military logistics, step of the process needs to move more efficiently? about half the items we manage are not forecastable. The demand is very infrequent, or it is demanded frequently but in highly variable A: One of things we found was we had volumes of regulations—interamounts. So, we may have a demand for 10 one quarter, 100 the next nal rules that went well beyond what was required by the Federal quarter, then none for two quarters. Those types of items are just Acquisition Regulation and the department—that were slowing hard to predict. Add to that the age of our systems, and you’ve got a down fully empowered, hard-working and smart DLA contracting tough problem. officers.

On the other hand, half of our items are highly forecastable, and So with this mandate to streamline the processes, I trust our conDLA and the services do a great job forecasting them. The problem tracting officers to make the right call with not a lot of oversight and is that, with all our items, it takes too long to buy them. The point “mother may I” permissions. They will unequivocally do the right is that forecasts, unlike wine, don’t get better with age. So it’s thing and they are fully empowered to do a bang-up job. important that the procurement processes support the forecasting processes when those forecasts are relatively fresh and as accurate Q: We talked about Captains of Industry; I’d like to go back to that. as possible.

You gave some great examples of how that’s worked and what the Rand Corporation did some great work and essentially said we’ll results of that have been. Are you holding more Captains of Indusget much better inventory performance by spending more time try than you did last year? Do you expect the numbers to grow based reducing contracting lead times and less time trying to forecast the on the successes you’ve had? unforecastable. And they’re right.

The key in terms of buying the right amount of inventory—no A: We host a Captains of Industry meeting about every six to eight more, no less—and having it when customers need it is not all about months with senior industry leaders from one of the supply chains. more and better forecasting. This surprised many who thought, “If These executives are all ferocious competitors for our business so we could just forecast better, life would be great—if we just had better they don’t let a lot of secrets out, but we do talk about issues that metrics, if our models had more arithmetic in them, we’d be much are common across the supply chains between the government and better.” Not so. The real key is a system that is responsive, flexible industry. Then we write down what it is that we have committed to and fast. So, the key, for DLA anyway, is speed—speed, speed, speed. do. And when we have the next meeting, the first things we talk about are things we have fixed—tangible actions we’ve taken to make the Q: And the cycle is not predictable? relationship better.

Q: To be masters of inventory control supply chain management means you have to be a master of forecasting, understanding the 6 | MLF 8.5 | Defense Logistics Agency

A: Right. That’s for our forecastable inventory. For the stuff that’s tough to forecast, rather than continuing to chase the forecast, www.MLF-kmi.com

defense logisitcs agency we’re going to buy a level of inventory and keep it there—and that’s it. So we’ve actually “de-mathed” the difficult-to-forecast items. That’s the nature of our business and no amount of forecasting goodwill and intent is going to fix it. About half of what we manage here is extremely difficult to forecast, not for lack of trying. That’s just the way it is.

Q: A growing concern, both in and out of the military, is health care cost. Can, and how can, DLA help impact the health care cost to the military?

A: That is our second biggest supply chain, right after fuel, at about $5 billion. One of the biggest changes that has just been wonderful in terms of our ability to drive down cost is the standup of the Defense Health Agency with Lieutenant General Vice Adm. Harnitchek addresses the Kentucky Air National Guard, 123rd Airlift Wing, May 19, 2011. [Photo courtesy of DoD] Doug Robb in charge. Here you have a physician who understands both the patient one pill. Instead of awarding multiple contracts, we have one concare side of the equation and medical logistics as well. tract for one drug. You export that across all of the medical comWe are General Robb’s agent to help reduce those logistics modities that we use, the savings there are enormous. costs. For instance, we recently awarded a 10-year, $19 billion pharmaceutical distribution contract that includes a discount of 9 Q: Right now, most logisticians in the military have cut their percent—that’s about $800 million in real savings over the life of teeth in a wartime environment. There’s talk about resetting the contract. equipment—what needs to be done to reset the mindset and the Another thing we’re going to do is award a similar contract on framework that a logistician operates within now? a global, vice regional basis. So you’re going to have major health care providers competing for 10 years’ worth of global medical A: That’s a great question. There are folks that have grown up logistics business. I’ll tell you—folks will get their pencils pretty since 9/11 in a fully-funded budget and pretty big supplementals, sharp for a 10-year global contract. and they’ve become pretty used to that. My service chief, Admiral Other ones are simply national contracts for pharmaceuticals.

Greenert, said everybody needs to be much more judicious. That’s a We wrote a contract for one pill and saved almost $2 million. That’s

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defense logistics agency big thing and an all-hands effort. So before we spend that next nickel, is that a nickel we ought to spend, or is that a nickel we ought to save or spend somewhere else? If we’re going to make an investment, what is better operationally? Does that investment take cost out somewhere else? If it doesn’t, you probably shouldn’t do it.

Some of this is also education. As you know, in logistics everything touches everything else and there are lots of players in the log nation. So to ensure our folks understand the integrated nature of logistics, we are requiring our folks attain a Defense Acquisition University life cycle logistics certification. This means that we’re transforming our logistics workforce from logistics technicians to logistics professionals. The intent is to train people to understand the big system in which they operate and know how to think their way through complex problems where there is no easy solution. Our workforce reset will increase their understanding of the entire Vice Adm. Harnitchek visiting the geographic South Pole on January 27, 2011. [Photo courtesy of DoD] acquisition and product support processes; What I tell folks here is that these are pivotal times and the increase the cost-consciousness of the workforce; help us to expectations of them are exactly the same as they have been. The reduce redundancy; and enable us to build stronger relationships only problem is we’re going to have to do with a lot less money. with our customers to better understand their requirements to So we’ve simply got it figure out how to do that, and that’s going control costs. to require everybody in this big log enterprise to be bold, be So whether someone is in contracting, supplier or customer confident and hold themselves accountable for delivering the operations or product specialist work, understanding the big results. picture of acquisition lifecycle logistics is important for them So my advice to young logisticians is the same guidance to effectively do their job and execute our mission. I want DLA I give to our folks at DLA. In fact, it’s the same guidance that professionals to understand the whole logistics forest—not just General McNabb gave us at TRANSCOM when I was his deputy. their trees.

Q: Talking about the individual logisticians, especially the young logisticians coming through the chain now, what advice do you have for them to be better logisticians, to be better servicemembers in general?

A: I’m heartened by the amazing feats of logistics that the big enterprise has done over the last 12 years, especially in Iraq and Afghanistan. They have worked hard, solved tough problems, achieved miracles, and frankly, made it look easy.

Everywhere in Iraq, everywhere in Afghanistan, time and time again: numerous surges in OEF/OIF; the speedy acquisition and movement of mine resistant ambush protected vehicles in the thousands into Iraq and Afghanistan; the closure of the Pakistan ground lines of communication; the establishment of the Northern Distribution Network; multimodal operations; supply chains in Iraq and Afghanistan that are exclusively commercial. Add to that a litany of natural disasters—the earthquake in Haiti, the tsunami and the earthquake in Japan, Hurricane Sandy in the States—and you’re talking about a group of young logisticians that are unstoppable in terms of intellect, hard work, leadership and the intestinal fortitude to just get things done. There has never been a better or more combat-tested group of logisticians than we have today.

8 | MLF 8.5 | Defense Logistics Agency

• We are living in historic times … doing things we’ve never done before … make some history yourself.

• Push for smart things to do … don’t wait for the requirement … or for folks to ask.

• No one knows this stuff better than you … so act like it.

• I trust you to do the smart thing … prioritize, do it your own way but get it done or ensure it gets done.

• This is your time … do big things and make the system better … if not you, who? If not now, when?

• Relationships are key.

• Take care of one another.

• Keep promises.

Q: Is there anything else you’d like to add?

A: This has been a pivotal time in military logistics and I want give special recognition to our civilian logisticians. When you look at the big DoD logistics organizations, it’s our great civil servants, the civilians who really know the business, understand it and are the backbone making great things happen. So BZ to our civilian shipmates throughout the DoD log nation. Thanks and good on you! O www.MLF-kmi.com

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